How Can the Board of Directors of an HOA Be Held Liable?
April 14, 2022 / by HOA Manager
An HOA board of directors has a fiduciary responsibility to the association. They're tasked with upholding the governing documents and the rules of the association. There's also the business judgment rule that says if the board receives expert advice on a topic, and they follow that expert advice, it provides them with a level of protection if there's a lawsuit against the board or the association.
Fiduciary Responsibility refers to a "person or organization that acts on behalf of another person(s), putting their interests ahead of their own, with a duty to preserve good faith and trust. It requires being bound both legally and ethically to act in the other’s best interests.” (Investopedia)
HOA board members are required to do their Due Diligence about the business of the association. Board members should be present and participate at meetings, be involved with maintenance and violation issues, make decisions in the best interest of the association, and keep accurate corporate records.
Board members also have a duty to be loyal to the association and the decisions of the board, sometimes at the expense of their personal interest.
Business Judgement Rule
This rule protects the association from inconsequential lawsuits. Its basic principle is that it’s unreasonable to expect board of directors to make optimal decision all the time. We all make mistakes, right? If the HOA is taken to court, as long as a court believes that the Board is acting rationally and in good faith for the members of the Association, no action will be taken against them.
Directors and Officers Insurance
Directors and Officers insurance covers errors made by the Board or committee members while acting on behalf of the Association. It’s necessary to protect an Association from any misleading statements, omissions of any Board member, wrongful acts, breach of duty, neglect, or errors.
All associations should have directors and officers insurance. This protects the association and the directors and officers (board of directors) – if they are acting reasonably. If they act outside of the law, boundaries of reasonableness, duty of care, and duty of loyalty to the association, the insurance will not cover them.
Since each HOA community is unique, it’s important that an HOA board consults experts and follows their advice. This offers another level of protection for the Board. There’s always the potential for a lawsuit, and there are actions you can take if your HOA board is faced with a lawsuit.
Maybe your HOA board hasn’t been faced with a lawsuit yet, but it’s a good idea to be aware of the most popular issues that lead to lawsuits, such as enforcement of documents, construction defects or third-party issues like neighbors disagreeing over a design review.
Whatever the issue may be, an HOA manager can help guide the process, act as the point of contact, and help your board stay on top of ever-changing laws to protect the association from being held liable in the first place.
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Topics: HOA Management, HOA Board, Member of HOA